The National Housing Strategy: Affordability Focus Needed

Wendell Cox, December 23, 2016

In drafting a National Housing Strategy, the federal government, in cooperation with the Canada Mortgage and Housing Corporation (CMHC) and the Conference Board of Canada have produced a report on findings from public consultation. The there is much to commend in the document, “Let’s Talk Housing.” The important role of housing in economic growth was cited. Housing was referred to as an important component of the federal government’s “overall approach to strengthening the middle class, promoting inclusive growth for Canadians and helping to lift people out of poverty.” There is an appropriate focus on facilitating housing for vulnerable populations, a public responsibility that few would dispute and concerns are also raised about middle-income housing affordability.

For most Canadians, the most critical issue is middle income-housing affordability, which threatens to increase the size of vulnerable populations as house prices race ahead of incomes. In just the last 15 years, house prices have risen at three times the rate of incomes across Canada and more than four times in the Vancouver and Toronto CMA’s.

These two areas have had by far the strongest housing strategies. Yet the housing outcomes in the Vancouver and Toronto area have been disastrous for middle income households. With some of the world’s strongest housing regulation, both CMA’s have declared large swaths of greenfield land off-limits to new housing. Consistent with economic principles, this rationing of land has been associated with unprecedented house price increases relative to household incomes.

RBC indicates that in the Vancouver area, the median income household needs 88 percent of its pretax income to pay the mortgage, taxes and utilities on the average priced house. In the Toronto area, it takes 61 percent. CMHC guidelines suggest that monthly housing costs should not exceed 32 percent of incomes.

“Let’s Talk Housing” also indicates that “in particular, there is a shortage of affordable ground-oriented homes, suitably sized homes for families…” In Vancouver, RBC says that detached housing, in which so many Canadians grew up, now requires 120 percent of the median pretax incomes. Future generations of Vancouverites simply have no hope of living as well as either their parents, nor do those in Toronto.

This is a stark reversal from the past. In both the Vancouver and Toronto areas, middle income households could afford ground-oriented detached housing before these land use regulations were imposed.

Worryingly, other governments across Canada have not learned from these disasters and are following Vancouver and Toronto like mythical lemmings headed for a cliff. Even in Prairie metropolitan areas such as Calgary, Edmonton, Winnipeg, Saskatoon, and Regina, with some of the most bountiful land supplies in the world, governments are fixated with severely restricting the peripheral detached housing that is so crucial to preserving housing affordability.

Moreover, without reforms, middle income housing affordability is only likely to worsen. Prices could escalate from the present 11 times household incomes in the Vancouver area toward the nearly 20 times and more of Hong Kong and major Chinese cities. Toronto could follow.

The tragedy is that in Canada and around the world, restrictive land use policies have been justified by the most noble of intentions, such as increasing the availability of affordable housing to vulnerable populations. But noble intensions do not preclude ignoble results, as the experience indicates. Housing policies that lead to higher prices relative to incomes weaken rather than strengthen the middle class. They put middle-income housing out of reach to middle-income households do fostering exclusionary growth, not inclusionary growth. Higher house prices do not lift people out of poverty, they force them into poverty.

The federal role in provincial, regional and local housing markets is rightly limited and should not be expanded. Yet, the federal government and the Bank of Canada face an economy burdened by extremely unaffordable housing and worsening prospects. The Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) have raised serious concerns about the potentially harmful consequences of Canada’s overpriced housing market on the economy. Last month, CMHC issued an unprecedented “red warning” for the entire Canadian housing market.

The federal government, and the Bank of Canada, should undertake provincial and regional land use authorities to undertake land supply oriented policy reforms that, at a minimum, stop the rampant housing inflation and, in the longer run, genuinely improve housing affordability.

Wendell Cox is Senior Fellow for Housing Affordability and Municipal Policy at the Frontier Center for Public Policy.